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Dexia Krach: The start of a domino effect in the EU?

Éric Toussaint

In the early days of October 2011 the virtual bankruptcy of the Franco-Belgian bank Dexia is yet another sign of how deep is this crisis that brings governments to serve public money to private interests. Dexia’s krach shows that it is the private banks that are the weak link in the debt crisis whereas governments and mainstream media highlight the public debt aspect of the crisis [1].

In September 2011, faced with the weight of menaces that loomed over the whole private financial sector because of its irresponsible policies, western European central banks (the European Central Bank – ECB, the Bank of England and the Bank of Switzerland) and the US Federal Reserve took a mightily significant measure: they would provide private banks with all the cash they need in dollars and euros for more than three months so they may weather the storm into 2012. This shows how deeply afraid governments and state treasurers are of what might happen in the last term of 2011. European banks that were borrowing in dollars on the short term from US money market funds were being refused. Central banks had to intervene to prevent the kraches of BNP Paribas, Dexia, Société générale, Crédit Agricole, Natixis to mention but a few French and Belgian banks. This new krach at Dexia [2] shows that the measure was not sufficient to solve a problem that is wrongly perceived as a mere liquidity shortage. Dexia may be only the first domino to fall in this fourth term of 2011.

Governments as main creditors in first and last resort

This is another neat demonstration: in the EU, central banks of member states and the ECB cannot lend money to governments that must therefore borrow from banks and other institutional investors. The private sector is thus supposed capable of financing on its own and without help from the governments, the needs of public bodies, business, and households. Now central bankers, i.e. governments, turn out to be their main creditor in the first and last resort.

European private banks are financed in five ways:

  1. They borrow from other banks on the interbank market;
  2. They borrow from households that leave their cash deposits – wages and savings;
  3. They borrow from non financial companies;
  4. They borrow dollars from US money market funds (that borrow from the Fed);
  5. They borrow from central banks.

Now the interbank market has shrunk to almost nothing for banks suspect each other of harboring toxic assets; household deposits in a time of crisis are not expandable, or worse, if households lose confidence in one or several banks, they may withdraw their deposits creating a run on the banks (which is a source of panic for bankers, central banks and governments, some of them as in France, limiting withdrawals by private customers); non financial companies withdraw their cash from the banks (in September the Financial Times revealed that the German TNC Siemens had transferred EUR 500 million from the French bank Société Générale to an account with the ECB) [3]; the money market funds have by and large stopped providing credit since June 2011. Consequently private banks turn mainly to central banks for credit.

ECB effects massive purchases of public debt on the secondary markets

That is not all. The ECB maintains a policy of massive buying up, of Irish, Italian, Greek and Spanish bonds, on the secondary debt market. Between 8 August and 11 September it purchased government bonds to the value of 77 billion euro, of which, 40 billion were Italian. [4] This policy has a double objective:

  1. Relieve West European private banks, who up to 2010 had been massively buying these bonds which are today considered to be potentially bad risks;
  2. Try to avoid Italy and Spain getting into the same situation as Greece, Ireland and Portugal who, because of the explosion of their interest rate, can no longer borrow for more than a year on the financial markets. The borrowing needs of Italy up to July 2012 are around 300 billion euro and that of Spain is close to 80 billion euro. If these two countries have to stop borrowing, because of exorbitant interest rates, the European Financial Stability fund (EFSF) will not dispose of sufficient means to cover their needs, not to mention the necessary buying up of Greek, Irish and Portuguese debts and perhaps also of other Eurozone countries. [5] What’s more, the EFSF is a very impractical instrument, created in May 2010 in reaction to the Greek debt crisis. For proof of this it is sufficient to notice that ten weeks after the decision, on 21 July 2011, to increase its capital so that it may buy bonds and assist banks having difficulties, the ratification process by the 17 Eurozone governments is still not completed.

Since 21 July the crisis has worsened ; the stock markets remain unstable with very bearish tendencies, especially concerning banks; economic growth is in the negative everywhere, even in Germany that attained better results than the European average up to June 2011; the fall of consumption and industrial production has worsened; unemployment has increased almost everywhere; while exchequer revenue has decreased everywhere reducing the capacities of the states to service their debts; the possibilities of new failures of private financial institutions is generally feared.

European governments caught in their own net

At the creation of the EU and the ECB it was decided that the ECB, along with the central banks of the member states, would not be permitted to lend directly to states, who should find their financing on the private markets (banks, insurance companies, pension funds…). If the ECB and the different central banks had been allowed to lend to public institutions, as the Federal Reserve does to the United States government, the effects of the crisis would have been attenuated. Far from us to take the United States as a model, but it is worth noting that the Fed has been able to buy treasury bonds for more than 1700 billion dollars, including 900 billion since the liquidation of Lehman Brothers in September 2008. [6]
Other characteristics of the EU aggravate the crisis. The Union’s budget is small and the transfer of means towards the weaker economies is very limited. In comparison, if the United States had the same constraints and the transfer of means from the federal government to state governments was as weak as in the EU, about a dozen states of the USA would be in the same situation as Greece and Portugal: Virginia, Maryland, New Mexico, Florida…

The weaker economies of the Eurozone that have commercial deficits with the stronger economies (Germany, France, Netherlands, Belgium, Austria…) do not have the possibility of regulating their exchange rates in order to favour their exportations. The Eurozone has become a straight jacket. This is why the idea of dropping the Euro has been raised across all political tendencies.

The crisis of the Eurozone and beyond of the EU is well established. It is well known that fish start rotting from the head. The crisis crosses all the centralizing bodies of the EU and the Eurozone, the governments disagree on measures that would be necessary. Nicolas Sarkozy and Angela Merkel disagree on the steps to take. The German government is favourable to a greater reduction of the value of Greek bonds, whilst the French insist on reducing no further than the 21% agreed on the 21 July following the proposition put forward by the International Finance Institute, the cartel of the banks which are the principal creditors to Greece. In clear opposition to the German government, Josef Ackermann, president of said cartel and executive director of the Deutsche Bank, insisted, during the annual reunion of the World Bank and the International Monetary Fund in Washington at the end of September 2011, that he was opposed to any reviewing of the 21% reduction limit. He hammered out „If we now start reopening this Pandora’s box we will lose a lot of time” [7]. So we see disagreement between governments [8]. The EU and Eurozone crisis is also felt directly in the institutions: Jürgen Stark, German administrator of the ECB, resigned angrily in September 2011, expressing publicly his disagreement with the policies of Jean-Claude Trichet, particularly with the purchase by the ECB of Greek and Italian bonds, amongst others.

Meanwhile, the British government maintains its autonomous positions. Pleased it had not entered the Eurozone, it has the possibility of managing the exchange rate of the pound. Although the United Kingdom has a greater public debt than Spain, the British government has much greater leeway on its monetary policies than the Spanish government. The British government is opposed to the majority of the other European governments over the creation of the „Robin Hood tax”. If it ever does exist, it is probable that it will be applied only in the Eurozone countries. This would be sufficient to create the critical mass. The problem with this tax is its timidity…

The British government is also seriously considering prosecuting the ECB for obstruction to the free movement of capital, if it rules that companies who do big transactions in Euros must be domiciled in the Eurozone. This would not be in the interest of the City of London as a tax haven [9].

Among the governments of Eurozone countries, some, such as the Slovaks and the Finns, have expressed doubts concerning the 21 July agreement, producing a climate of incertitude as to whether this agreement will eventually be ratified by these governments.

The Eurozone debt crisis had another victim in July 2011: Cyprus, which was hardly mentioned by the media and the EU leaders. Cypriot banks have been hit directly by the Greek crisis. The principal reason for this silence is that Cyprus, seeing the effects of the austerity measures imposed on Greece, Ireland and Portugal, wants to get out of its fix without asking for Troika (European Commission, ECB and IMF) assistance, preferring to engage negotiations with Russia for a loan of 2 billion euro. The Italian government is also attempting to avoid the bullying of the Troika by asking China to increase its purchases of Italian bonds.

The events of 2007-2008 did not at all lead governments to impose strict prudential rules. However, measures to prevent financial institutions (banks, insurance companies, pension funds, hedge funds, etc.) from further undermining our economy must be taken. Governments and CEOs, that are directly or indirectly responsible for banking and stock exchange collapses, must be prosecuted. In the interest of the vast majority of the population, it is urgent to expropriate the banks and make sure they serve the common good, by nationalizing them and putting them under workers’ and citizens’ control. Not only should we refuse any compensation to major shareholders, but we should demand that these same shareholders pay for the cost of sanitizing the financial system. We must also repudiate the illegitimate debts that private banks claim from governments. Of course, a number of complementary measures must be implemented, such as controlling capital flow, prohibiting speculation and transactions with tax and judiciary havens, and the creation of a tax system geared towards social justice… In the context of the European Union, treaties such as those of Maastricht and Lisbon must be abrogated. The statutes of the European Central Bank must be radically changed. While the crisis has not yet reached its peak, it is high time to take a U-turn and enforce an anti-capitalist outcome to the banking and stock exchange turmoil.

[1] Obviously the public debt crisis is very serious and calls for radical solutions but it is important to stress the fact that the crisis of private banks does not result from the public debt crisis, quite the opposite.
[2] Dexia was bailed out by the joint action of the French, Belgian and Luxembourg governments in October 2008. This costly intervention did not change anything to the managerial structure and the functioning process of this bank that had been privatized in the 1990s.
[4] See Financial Times ‘Central banks walk a monetary tightrope,’ 23 September 2011, see also in the same edition: ‘Italy: Fight for credibility continues.’ The total amounts that were bought by the ECB between May 2010 when it started buying Greek bonds on the secondary market and 12 September 2011 was EUR 143 billion. In May 2010 and March 2011 the ECB had bought Greek bonds for EUR 66 billion. Then it stopped buying any until 8 August 2011. See on this: Eric Toussaint ‘The ECB, ever loyal to private interests’
[5] In September 2011, nearly half of the Eurozone public debt (totalling 6500 billion euros) is considered a bad risk. This now includes Belgian public debt which represents 5% of the Eurozone public debt. The Greek part is 4%, Portugal 2%, Ireland 1% , Spain 9% and Italy 26%! (See Martin Wolf, « Fear and loathing in the eurozone », Financial Times, 28 septembre 2011).
[6] Financial Times, « Central banks walk a monetary tightrope », 23th september 2011. One of the big flaws in the Fed policy is to have bought toxic assets from private financial institutions (related to the subprime market) for a total of 1.25 trillion dollars and to have lent astronomical amounts to these same institutions to keep them afloat whereas the state should have expropriated them.
[7] See Financials Times, « IMF/World Bank meetings : Debt talks fail to agree solution », 26th september 2011.
[8] See Financial Times, « Splits over Greek bail-out », 28th september 2011.] but cohesion in the position of the bankers for the time being.
[9] See Financial Times, 14 septembre 2011

Éric Toussaint is PhD in political sciences from the universities of Liège and Paris VIII; he is president of the CADTM Belgium, a member of the presidential Commission for an integral debt audit in Ecuador, and a member of ATTAC France’s scientific council. With Damien Millet he edited ‘La Dette ou la Vie’, Aden-CADTM, 2011. Contributed to ATTAC’s book ‘Le piège de la dette publique. Comment s’en sortir’, Les liens qui libèrent, Paris, 2011.

[Artykuł zamyka serię siedmiu tekstów tworzących cykl „In the Eye of the Storm” – tłumaczenie z francuskiego na angielski: Christine Pagnoulle i Mike Krolikowski.]